RSI Market Regime Finder

The Relative Strength Index Market Regime

Imagine the RSI as a tool that helps you figure out if a stock or any other asset is overbought or oversold. It’s like trying to see if a party is too crowded or too empty.

The RSI measures the speed and change of price movements. When it’s high, like above 70, it suggests that the asset might be overbought. Think of it like everyone rushing in to buy the latest cool thing, and maybe it’s getting a bit too popular. On the flip side, if the RSI is low, below 30, it implies that the asset might be oversold. This is like when nobody wants to go to a party, and it might be a good time to check it out because things could pick up.

Now, why does this matter? Well, it gives you a hint about potential reversals in the market. If something is overbought, it might be time for a cool-down, and if it’s oversold, there might be a chance for a comeback. Traders often use RSI to get a sense of whether an asset is in a strong trend or if it’s about to change direction. So, in a nutshell, RSI is like a party meter for the market. It helps you gauge if things are getting too wild or if it’s a bit quiet, giving you a heads-up on potential changes in the market vibe.

Creating the Regime Detection Indicator

A market regime is essentially the prevailing state or condition of the financial markets at a given time. It’s like saying the market can have different modes or phases, just like a person can be happy, sad, or somewhere in between.

Now, these market regimes can be broadly categorized based on trends. Imagine a market in a strong upward trend — everyone’s feeling optimistic, prices are going up, and it’s like a bull (that’s the term for a rising market) is running around.

On the flip side, if the market is in a downtrend, it’s like a bear (that’s the term for a falling market) is dominating. People might be a bit more cautious, prices are dropping, and it’s generally a less optimistic atmosphere.

The tricky part is that markets aren’t always in a clear-cut bull or bear state. Sometimes they’re just moving sideways, not going up or down much. That’s another market regime, often called a “sideways” or “range-bound” market.

The conditions of the creation of the indicator follow these assumptions:

A bullish regime is taking place whenever the RSI is above 50 but below 75 while the last three RSI values were above 46.

A bearish regime is taking place whenever the RSI is below 50 but above 25 while the last three RSI values were below 54.

The script is super simple to use. Basically, whenever the green line is in progress, a bullish regime is taking place, and whenever the red line is in progress, a bearish regime is taking place.

Long strategies fit well within a bullish regime while short strategies fit well within a bearish regime.

All the credit for this script goes to Sofien Kaabar. He graciously provided the code and I'm passing along his work.